Asian stocks rebound, euro pulls off lows as anxiety over Italy recedes

TOKYO - 31 May 2018: Asian stocks rebounded from a two-month trough on Thursday and the euro enjoyed a respite after sinking to its lowest in 10 months as the political turmoil in Italy that roiled global financial markets showed signs of easing.

Spreadbetters expected European stocks to open slightly higher, with Britain's FTSE .FTSE edging up 0.05 percent, Germany's DAX .GDAXI adding 0.1 percent and France's CAC .FCHI rising 0.05 percent.

Hong Kong's Hang Seng .HSI rose 0.75 percent and the Shanghai Composite Index .SSEC gained 1.4 percent after news that growth in China's vast manufacturing sector accelerated strongly and well above forecasts in May to an eight-month high.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS gained 0.6 percent after slumping on Wednesday to its weakest since early April.

South Korea's KOSPI .KS11 added 0.5 percent and Japan's Nikkei .N225 advanced 0.8 percent.

Overnight, the Dow .DJI rose 1.25 percent and the S&P 500 .SPX climbed 1.27 percent.

Global stocks were battered, safe-haven government prices rose sharply, and the euro tumbled earlier in the week after Italy’s two anti-establishment parties scrapped plans to form a coalition.

That raised the prospect of a new general election, stoking fears such a vote would effectively be a referendum on Italy’s euro membership.

A degree of calm, however, returned with the two anti-establishment parties renewing efforts to form a coalition government rather than force Italy into holding elections for the second time this year.

“Experience shows that these ‘crises’ tend to settle down for long periods once the initial adjustment of market expectations has been effected,” Carl Weinberg, chief international economist at High Frequency Economics, wrote in a note to clients.

A successful auction of five- and 10-year government bonds also assuaged concerns about Italy’s ability to finance itself after the turbulence in its debt market sparked the biggest one-day spike in two-year bond yields in 26 years. Bond yields rise as prices fall.

“The financial markets have been able to assess and digest the situation in Italy over the past few days and it is now time for a bit of a reprieve from the turbulence,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management in Tokyo.

“The reprieve will allow the markets to return their focus back on fundamentals, such as Friday’s U.S. non-farm jobs report.”

The euro stood little changed at $1.1664 EUR= after rallying 1 percent the previous day. The currency had sunk to $1.1510 on Tuesday, its lowest since late July 2017.

The dollar index against a basket of six major currencies .DXY dipped 0.1 percent to 94.055 after surging to a near seven-month peak of 95.025 on Tuesday.

The U.S. currency traded at 108.780 yen JPY=, off a low of 108.115 brushed on Tuesday when risk aversion in the broader markets increased investor demand for yen, which is often sought in times of market unrest.

The dollar received some support as signs of an easing in Italy’s political crisis pulled U.S. Treasury yields up from multi-week lows.

The 10-year Treasury note yield US10YT=RR stood at 2.849 percent after declining on Tuesday to 2.759 percent, its lowest since April 11.

Crude oil prices eased after rallying overnight.

U.S. crude futures CLc1 fell 0.18 percent to $68.09 a barrel after gaining 2.2 percent on Wednesday when Russia’s central bank expressed caution on plans to boost oil supply.Prices fell to a six-week low of $65.80 a barrel on Tuesday amid concerns that Saudi Arabia and Russia might increase their output.

Brent crude LCOc1 lost 0.35 percent to $77.23 a barrel after jumping 2.8 percent on Wednesday.